Britain's top court ruled on Friday that Uber drivers are "workers" and are therefore entitled to received minimum wage and paid leave.
The decision could threaten the car service's business model and could have wider implications for the so-called gig economy.
The seven judges of the UK Supreme Court unanimously rejected Uber's appeal against a lower court ruling, and confirmed that drivers should be classed as "workers" and not as self-employed.
"The employment tribunal was right to find that drivers are workers," said Nicholas Hamblen, a supreme court judge, as he read out a summary of the ruling on a court livestream.
``"Drivers are in a position of subordination and dependency to Uber, such that they have little to no ability to improve their economic position or professional or entrepreneurial skill.," he added.
Uber had argued that it acted solely as a technology provider acting as a booking agent and that when a ride is booked, a contract is thus made directly between the driver and the passenger. It said that its 20 per cent commission is a "service fee" for letting the driver use its technology.
The judges said however that the contract is made between Uber and the passenger with the company setting the fare and constraining the driver's ability to reject fares. Judges also found that Uber imposed "what amounts to a penalty" if a driver rejected too many trips.
Uber said in a statement that they "respect the Court's decision" but flagged that the ruling "focussed on a small number of drivers who used the Uber app in 2016".
For the company, the verdict means that only this small group of drivers must now be classed as workers and not all of its 65,000 active drivers in the country.
It also said that key features called out in the judgement no longer exist, with drivers facing no repercussion for rejecting consecutive trips since 2017.
Jamie Heywood, Uber's regional general manager for Northern and Eastern Europe, said that the company has "made some significant changes to our business, guided by drivers every step of the way. These include giving even more control over how they earn and providing new protections life free insurance in case of sickness or injury."
Uber will now launch a national consultation with its drivers "to help us shape the future fo flexible work".
Shares in Uber were down 3% in premarket trading in New York.